The functions of the bronchiolar Clara cell are not known although it is generally believed that the cell is secretory. Using a model system, developed in this laboratory, we have identified a low molecular weight protein (Mr 12,500) as the major protein secreted by Clara cells. We have also identified the major secretory a simple procedure for its isolation. Antiserum developed in goats against highly purified Clara cells (purity greater than 90%) has been used to localize Clara cell secretory proteins within the osmiophilic cytoplasmic granules of bronchiolar Clara cells indicating the storage nature of the granules and that secretion of the low molecular weight protein probably occurs via a regulated pathway. We have also isolated mRNA from rabbit lungs and demonstrated that the primary translation product has a molecular weight about 1 kDa larger than the secreted form of the protein. The additional peptide was a signal peptide as indicated by its loss from the molecule when translation of the messenger was performed in the presence of microsomes. These studies identify the major secretory protein of Clara cells as a low molecular weight protein that appears to be stored within the cytoplasmic osmiophilic granules. We have also investigated the differentiative potential of Clara cells by inoculating purified cells into rat trachea denuded of their own epithelia. These trachea were then grafted onto the backs of nude mice and examined periodically for regeneration of epithelium. We have determined that Clara cells can multiply and generate an epithelium which consists of Clara cells and ciliated cells thus establishing the stem cell nature of this bronchiolar cell. Future studies will explore the ability of Clara cells to differentiate into mocous cells using the tracheal graft model and focus on the extracellular function of the low molecular weight secretory protein.